Bernanke Freaks Out About Obama's Spending And Debt Plans

Ben Bernanke's language yesterday on
the future of the economy and the risks of our ballooning debt
was startlingly frank coming from a Fed Chairman.

Specifically, Bernanke warned that the recovery is likely to be
weak and that Obama and Congress need to get spending under
control or the interest payments will start to destroy us.

He agreed that the size of the deficit is contributing to rising
interest rates (very startling point, especially in light of
Treasury's happy chirps that rates are rising because the economy
is recovering.) He also cast doubt on the effectiveness of the
stimulus programs.

Most importantly, Bernanke also raised concern about our
impending debt-to-GDP ratio of 70%, which is well below the Obama
administration's (probably optimistic) forecast of 100% for the
next decade.

As a consequence of this
elevated level of borrowing, the ratio of federal debt held by
the public to nominal GDP is likely to move up from about 40
percent before the onset of the financial crisis to about 70
percent in 2011. These developments would leave the debt-to-GDP
ratio at its highest level since the early 1950s, the years
following the massive debt buildup during World War
II.

Here's how this 70% compares to the ratio projected by Obama's
OMB:

In the past several weeks, John Taylor, Niall Ferguson, John
Mauldin and others (see links below) have clanged alarm bells
about the size of our deficit. Today, PIMCO's Mohammed
El-Erian joins this chorus:

Mr Bernanke...[uses] strong words, and appropriately so given the
worrisome fiscal outlook facing the US. By necessity, Mr Bernanke
will increasingly be in the business of countering monetisation
and inflation concerns.

Indeed, the markets have already fired a couple of clear warning
shots in the last couple of weeks, as illustrated by recent moves
in US bonds and the dollar.

The chairman’s challenges on this count are neither easy nor
amenable to quick solutions. Moreover, as markets increasingly
look into the underlying factors, as inevitably they will, they
will recognise the difficulty that the government faces in
credibly committing to the needed primary fiscal adjustment in
the absence of high economic growth.

The bottom line is that we should come away from Mr Bernanke’s
testimony with at least two conclusions: the chairman seems more
cautious about the growth outlook when compared with other recent
public statements; and he wants to push fiscal sustainability
issues clearly away from the Fed’s domain and back where they
belong, with Congress and the administration.